How EMI Share Options Are Taxed When Employees Exercise or Sell Shares

EMI share options are free of income tax and National Insurance at both grant and exercise, provided the option was granted at a market value agreed with HMRC, with tax falling instead as capital gains tax when the shares are sold. That is why Enterprise Management Incentives remain the most tax-efficient way for a UK limited company to give key staff a real stake in the business. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, advises company owners who want to reward the people building the value without handing them a tax bill on shares they cannot yet sell. This guide covers when an EMI option becomes taxable, what a discounted grant costs, how much capital gains tax applies on a sale in 2026/27, and what the company must report and can claim.

Key Takeaways

• EMI share options granted at a market value agreed with HMRC create no income tax and no National Insurance charge on either grant or exercise.
• Capital gains tax on the sale of EMI shares is charged at 18% within the basic rate band and 24% above it in 2026/27, after the £3,000 annual exempt amount.
• Business Asset Disposal Relief reduces the capital gains tax rate on qualifying EMI shares to 18% on gains up to a £1,000,000 lifetime limit in 2026/27.
• Where an EMI option is granted below market value, the discount is taxed as employment income on exercise at 20%, 40% or 45%.
• Employer National Insurance at 15% arises on a discounted EMI exercise where the shares count as readily convertible assets.
• The employing company can deduct the employee's gain on exercise against profits, worth 25% of that gain at the main rate of corporation tax.

When are EMI share options taxed: at grant, exercise or sale?

An EMI share option is not taxed at grant, is not normally taxed at exercise, and is taxed only when the shares are sold. That pattern is why employee share scheme tax planning in an owner-managed company almost always starts with EMI rather than an unapproved option or an outright gift of shares.

At grant the employee receives only a right to buy shares at a fixed price, so Schedule 5 ITEPA 2003 imposes no income tax or National Insurance. At exercise the employee pays that price and takes the shares. For an unapproved option this is the expensive moment, because the difference between market value on the day and the price paid is taxed as employment income, usually when there is no cash and no buyer. For an EMI option granted at the market value agreed with HMRC in advance, no income tax arises on exercise at all, and the charge lands instead on disposal as capital gains tax.

How is income tax charged if EMI options are granted below market value?

If an EMI option is granted at less than market value on the day of grant, the discount is taxed as employment income when the option is exercised, at 20%, 40% or 45%. Everything above that discount still escapes income tax, so a discounted option remains far better than an unapproved one.

Take an employee granted options over 10,000 shares at 10p, when the value agreed with HMRC at grant was £1.00 a share. The discount is 90p a share, or £9,000. On exercise that £9,000 is taxed as employment income, costing a higher-rate taxpayer £3,600. If the shares are readily convertible assets, for example because a sale is already under way, the charge runs through PAYE and employer National Insurance at 15% adds £1,350 for the company.

The employee is not taxed twice. The £1,000 exercise price plus the £9,000 already charged to income tax together form a £10,000 base cost, so the eventual capital gain is measured from £10,000.

How much capital gains tax is due when EMI shares are sold in 2026/27?

Capital gains tax on EMI shares sold in 2026/27 is charged at 18% on gains within the basic rate band and 24% above it, after the £3,000 annual exempt amount. There is no separate rate for shares.

Take an employee granted options over 10,000 shares at the full agreed value of £1.00, exercised four years later and sold on a trade sale at £9.00. Proceeds of £90,000 against a £10,000 base cost give an £80,000 gain, and after the annual exempt amount £77,000 is taxable. For a higher-rate taxpayer with no relief that is £18,480 at 24%. With Business Asset Disposal Relief the rate falls to 18%, giving £13,860 and a saving of £4,620.

EMI shares reach that relief far more easily than ordinary shares. Section 169I TCGA 1992 disapplies the usual 5% shareholding test for shares acquired under an EMI option, and the two-year qualifying period runs from the grant date rather than the exercise date, so an employee can exercise on the morning of a sale and still qualify. One trap is worth naming: because the relief rate and the basic rate of capital gains tax are both 18% in 2026/27, Business Asset Disposal Relief saves nothing on a gain sitting entirely within the basic rate band.

What must the company report to HMRC, and what relief does it get?

The company must notify HMRC of every EMI grant within the statutory notification window and file an annual share scheme return, and in return it can deduct the employee's gain on exercise against its taxable profits. Missing the notification deadline is the most common and most expensive EMI failure, because the option is then treated as unapproved and the whole uplift falls into income tax and National Insurance instead of capital gains tax.

The corporation tax relief is generous and often overlooked. Under Part 12 CTA 2009 the company deducts the difference between market value at exercise and the amount the employee paid. On the £80,000 uplift above, that is an £80,000 deduction, worth £20,000 at the 25% main rate of corporation tax and more at the 26.5% effective marginal rate between £50,000 and £250,000 of profit. No cash leaves the company to earn it. Agreeing the share valuation with HMRC before grant is the groundwork that protects everything else, and is best done alongside any wider review of share structure and director pay.

Frequently Asked Questions

Do I pay tax when my EMI options are granted?

No. An EMI share option grant creates no income tax and no National Insurance charge, because nothing of spendable value has been received. Tax is deferred to exercise, and where the option was granted at a market value agreed with HMRC, no charge arises then either. The first real tax point is the sale of the shares.

What tax do I pay when I exercise EMI options?

If the option was granted at the market value agreed with HMRC, exercising it creates no income tax or National Insurance charge. If it was granted at a discount, the discount is taxed as employment income at 20%, 40% or 45% on exercise, and employer National Insurance at 15% applies where the shares are readily convertible assets.

What is the capital gains tax rate on EMI shares in 2026/27?

Capital gains tax on EMI shares is charged at 18% on gains within the basic rate band and 24% above it in 2026/27, after the £3,000 annual exempt amount. Where Business Asset Disposal Relief applies the rate is 18% on qualifying gains up to a £1,000,000 lifetime limit, which saves tax only on gains that would otherwise fall at 24%.

Can employees claim Business Asset Disposal Relief on EMI shares?

Yes, and on easier terms than for ordinary shares. The 5% shareholding requirement is disapplied for shares acquired under an EMI option, and the two-year qualifying period runs from the grant date rather than the exercise date. The employee must have been an officer or employee of a trading company throughout that period.

How Blue Tick Can Help

Blue Tick Accountants advises limited company owners across the full EMI lifecycle, from testing whether the company and its employees qualify, through agreeing share valuations with HMRC before grant, to handling notifications, annual returns and the corporation tax deduction on exercise. Head to our website and book a meeting now.

Conclusion

The value of an EMI scheme lies in what does not happen: no tax at grant, no tax at exercise where the option was granted at an agreed market value, and a single capital gains charge at 18% or 24% when the shares are finally sold for cash. Against income tax at up to 45% plus National Insurance on an unapproved option, the difference on a meaningful exit runs into tens of thousands of pounds. The work that secures it happens at the start, in the valuation and the notification.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners, landlords and the self-employed across the UK. Leon advises owner-managed companies on share schemes, profit extraction and exit planning. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.